Planet Money's Podcast 'The Indicator' Tackles History Of BondsGovernments all over the world use bonds to raise money. We examine how the the first bond came to be, and how it transformed the way governments borrow money.

Governments all over the world use bonds to raise money. We examine how the the first bond came to be, and how it transformed the way governments borrow money.

STEVE INSKEEP, HOST:

The federal government raised more than a trillion dollars last year with government bonds. A bond is the way the government borrows money. They sell you a bond and promise to pay you back later. During this time of enormous federal borrowing at levels that are unusual during good times, we have the backstory of bonds. Their invention was less about financial innovation and more about appeasing a mob. Here's NPR's Stacey Vanek Smith of the Planet Money Indicator podcast.

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STACEY VANEK SMITH, BYLINE: Government bonds work like this. You buy, let's say, a hundred dollars' worth of 30-year Treasury bonds. The government takes that hundred bucks and uses it to help pave a highway or contribute to someone's unemployment check or mow the White House lawn. And in exchange, you get a regular payout every year until the 30 years is up. At the current rate, you get about three bucks a year. And 30 years later, you would also get your hundred dollars back, so 190 bucks in total. It's a pretty slick system. And it all traces back to 12th-century Venice. At the time, Venice was one of the most important and powerful cities in the world, a center for innovation, culture and global trade. But Constantinople, another Middle Ages powerhouse, decided to make a move on Venice. Venice had to respond.

WILLIAM GOETZMANN: The government of Venice needed to build a fleet of ships in kind of a hurry.

VANEK SMITH: William Goetzmann is the author of "Money Changes Everything."

GOETZMANN: So it basically taxed all the people in Venice.

VANEK SMITH: This emergency tax Venice levied was not your typical tax. The government said it would pay people back for this tax. And the idea was that the Venetian fleet would sail over to Constantinople, crush the enemies, sail home triumphantly with a bunch of booty and pay everybody back.

GOETZMANN: It was a complete disaster.

VANEK SMITH: The Venetian fleet got hit with the plague. Thousands of people died, and the surviving Venetians came home in defeat.

GOETZMANN: The doge, the head of Venice, had gone out on this expedition. He did come back. And when the Venetian people saw that he survived, they chased him down the street and executed him.

VANEK SMITH: Oh. Venice's governing council was like, uh oh. They did not have the money to pay back the tax loan. And the mob was not in a mood to be told no, so they came up with a plan.

GOETZMANN: They said, well, we're going to pay you every year something like 6 percent until we can pay you back.

VANEK SMITH: The bond was born - or the prestiti, actually. That is what they were called - prestiti. People loved them as a safe investment. And governments loved them because they could raise money for big, ambitious, risky projects.

GOETZMANN: It meant that, in some sense, cities could punch above their weight.

VANEK SMITH: Spain used bonds to help fund shipping expeditions to South America. Holland used bonds to build dikes. Bonds helped western European economies grow at the speed they did and to the scale they did. In fact, says William, China, which had been leaps and bounds ahead of Europe in terms of wealth and technology, started to fall behind, partly because of the money raised through government bonds.

GOETZMANN: The Chinese did not have this financing technology. They didn't issue bonds. So Europe takes off compared to China.

VANEK SMITH: Of course, bonds had their fair share of problems, too. I mean, they make it really easy for governments to take on a lot of debt. During the financial crisis, countries like Portugal, Greece, Spain and, ironically enough, Italy took on way too much debt and got their economies into a lot of trouble. Even still, bond sales continue to be a crucial way for governments to fund their operations. And it was all thanks to this innovation from Venice in the 1100s. Stacey Vanek Smith, NPR News.

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